Is It Better to Incorporate or Be a Sole Proprietor?
If they are successful, many sole proprietors will eventually face the decision of whether or not to incorporate. As the business grows, the financial responsibilities become greater, and the risk of legal action against the business also grows. But incorporation is a complex step and one that should be taken with all the pros and cons considered.
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Liability
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Incorporation prevents you, as the business owner, from being held personally liable for the debts and other financial obligations of your business. A corporation moves that liability to the shareholders, who assume the financial risks when they invest in your business. This protects your personal assets from seizure to satisfy any court judgments.
Financing
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Lenders look more favorably on a corporation that can present more details of their assets and liabilities, cash flow, income and business plan. Banks have more confidence their loans will be repaid when a corporation shows an ability to raise money, if necessary, through an issue of shares or other outside investment. As a result, loans are easier to get for the corporation and repayment terms will, in general, be easier. Directors and managers may still be asked for personal guarantees, however.
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Taxes
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As a sole proprietor, you owe taxes on income as it is earned and may deduct business losses from your personal income. A corporation allows you to defer personal income and thus your income taxes. Corporations allow you to determine when and how to pay dividends, which represent income to the shareholders and to yourself. A corporation has a more complicated time of filing tax returns, however, and sole proprietors must weigh the tax advantages with the additional time they will have to spend completing income-tax forms. Corporations can also qualify for various tax credits not allowed to sole proprietors.
Organization
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Corporations have a much more complicated organizational structure than sole proprietorships. By law, they must keep track of investors and directors, share issues and dividend payments and organizational bylaws and minutes (meeting records). This represents a cost of doing business as accountants and secretaries are hired to handle the forms and paperwork.
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A corporation presents a more serious and professional front to the marketplace, and if your business is in competition with other corporations, you may be at a disadvantage operating as a sole proprietor. Some companies prefer to do business with an incorporated business, as incorporation implies that a business is stable and serious about its work.
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References
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